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Paycheck Talks features musings from us (Rachael and Charlotte!) on managing careers, salaries, and personal finance. This week, we're sharing our learnings around stock compensation.
What's been your experience with stock-based compensation?
Rachael:
I got company equity for the first time back in 2014 when I joined Dropbox. I remember not understanding it very well - I was fresh out of school and was pretty naive about compensation in general. I ended up leaving for a different job before the shares vested (and before Dropbox IPO'ed), so it was always imaginary money. Looking back, it would have been a nice chunk of change, but nothing huge as I had been in a pretty entry-level role. Not too much FOMO : )
In my following roles, I started to understand how to navigate stock compensation better, little by little. At one job, I learned that equity programs are not always company-wide i.e. it can be pretty discretionary…another reason why more compensation transparency comes in super handy! You don't think to negotiate on stock if you never realized it could be a part of the package.
The biggest thing I learned is that, while it's easy to glorify stories of hitting it big with stock, a lot of stock-based compensation is pretty rubbish. For example, shares you have to pay to exercise without a guaranteed liquidity event are a vastly larger risk calculation than shares you automatically get at vest and can sell right away. I won't go too deep here. This post breaks down an example of startup equity nicely:
Atlassian was my first and only job where I've ever gotten real money from stock, and I've had a lot of jobs. There we got RSUs (restricted stock units) and were able to sell them as they vest since it's a publicly-traded company. I was extremely lucky with my timing of when I joined the company and how the stock grew in the ensuing years. At one point, my annual comp was majority equity. This hammered home that it can be worth paying more attention to stock, its different flavors, and how to better negotiate around it.
Charlotte:
I’ve had a similar experience. One job provided equity comp in the form of stock options that vested in the common 4 year vest, 1 year cliff. Because it was from a small startup with more risk, I never banked on it and didn’t factor it into any of my budgets or savings. I ultimately decided not to exercise the options and instead invested in something else that I felt more comfortable with.
In another job, I received RSUs that would vest periodically. Because this was for an established publicly traded company, I was more comfortable counting this as part of my total comp. But I budget my living expenses off base salary only, and think of my stock comp as savings that go straight towards investing.
Vested RSUs: hold or sell?
Rachael:
I tend to sell right away. Mentally it can feel strange to sell a thing you think may still go up, but I ask myself the following: would I go and buy that much stock in my company? That's in essence the same idea. If the answer is no, I should sell and invest it in other stocks. I'm already investing so much of my time and risk into this single company as my employer, to also concentrate my stock market portfolio with its shares seems like a lot of eggs in one basket. In the words of Warren Buffet, "diversification is protection against ignorance", and there is a whole lot I don't know. Granted, the taxes will be lower if you hold it for a year after vesting, but it doesn't seem worth it to me.
Charlotte:
With RSUs I agree with Rachael in the sense that, if you were getting this compensation in cash, would you go out and invest in that company’s stock? Or would you do something else with it (ex. pay off debt, put towards a downpayment, invest in something else, etc.)?
That being said, I’ve held on to them and haven’t sold yet because up until now they hadn’t been a super material part of my investments. However, I'm getting to the point where enough has vested that I am thinking of diversification (probably into a passive ETF). It’s on my list of financial to do’s.
What were some other things you learned along the way that you didn't know beforehand?
Rachael:
I think the terms of a company's stock program can say a whole lot about the company culture. Do you start vesting right away and consistently, or do they backload it? If it's a startup, how much of the company does that amount actually represent, and what terms do they have around paying out to employees vs. investors? Looking at company outcomes, it's striking how much more often an employee is going to be better off with a small amount of public stock than a huge amount of early-stage equity. I wouldn't join an early-stage company at this point unless I had a really great base, or just really truly (!) felt passionate about what they were building.
I have a lot more here…liquidity events, tax implications, the list goes on. The ins and outs of company stock are vast - let us know if there are other aspects you'd want covered.
Charlotte:
+1 to Rachael’s point. Stock comp is very different in my mind if you’re receiving it from a publicly traded company with established cash flows versus a startup that isn’t profitable yet.
People talk about stock comp as if it has magical powers, and they feel like they can’t touch it and are obligated to hold onto it. But in reality, it’s an investment in a company. So you have to believe in that company, its management, its assets, cash flow, and potential growth, otherwise you’d probably be better off investing in something else or using the proceeds for another purpose that’s right for you.
And that’s a wrap until next week! As always, drop us a note if any other questions or content you’d like to see.
Disclaimer: Nothing in this content should be constituted as financial, legal, tax, or investment advice.
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This was so interesting! I have stock options from two companies I worked for before they went public (they’re still not public). I don’t even include them in my financial planning because it’s possible I’ll never see that money again. But who knows, maybe it’ll make me some money someday!